Which investment property repairs are tax deductible?
When it comes to investment property repairs, they can be tax deductible or must be capitalised as a renovation or improvement.
Recently, the ATO has been looking into excessive claims for rental property deductions and the one area that has been in the firing line is incorrect claims for repairs. The distinction between a tax deductible repair and a capital improvement walks a fine line and as a result, it’s very easy to make a mistake. Here’s a breakdown of the differences..
What is a repair?
The tax legislation does not actually define the term “repair” for us. The ATO does however have a tax ruling that gives us an interpretation as to what is allowable as a repair and what is not.
As per the ruling, a repair means:
- The remedying or making good of defects, damage to or deterioration of property. A repair merely replaces a part of something or corrects something that is already there and has become worn out or dilapidated
- The work restores the efficiency of function of the property without changing its character
- A minor and incidental degree of improvement, addition or alteration may be done to a property and still be a repair
When is a “repair” not a repair for tax purposes?
- When the works result in an improvement and the work goes beyond just a “repair”
- The work was done too soon after acquisition and the property was not in good order when acquired. It is therefore classed as an initial repair
- The extent of the work carried out represents a renewal or reconstruction of the entirety
The test is if the work done produces a new, improved or different function than the original item and whether the wear and tear being remedied was already existing when acquired or not. For instance, repairing an existing window frame so it can be opened and shut again would be deductible. Putting a new window into the home to let more light in would be an improvement rather than a repair, and would therefore not be a deductible expense.
What is the tax treatment?
- “Repairs” considered to be actual repairs are immediately deductible
- Initial repairs made too soon need to be capitalised as part of the cost base of the property
- Capital works deductions are claimed at a rate of 2.5% per annum
- Brand new assets purchase that cost $300 or less (like a small printer) can be claimed in full
- Brand new assets purchased greater than $300 (like a new laptop) are depreciated over their effective lives
Second hand assets, including assets acquired in a second hand residential property, are not entitled to claim depreciation from the 9th May 2017, as the law was changed at this date. They need to be brand new assets acquired for this deduction to be allowed.
For more information on how repairs, capital improvements and assets are claimed for your rental property get in touch with us.
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